Labour market deregulation and wage dispersion: Does product market competition matter? The case of the EU electricity industry

In this work we analyze possible interaction effects of product and labor market deregulation on sectoral wage dispersion. In particular, we consider firm level data for the electricity generation sectors of twelve EU countries observed over the period 2002-08 which have been the subject of important deregulatory reforms. Our results suggest that higher barriers to entry in the product market are associated to a higher wage dispersion. Moreover, we find that the effects of a more liberalized labor market depend on the degree of product market regulation: when the goods market is tightly regulated, a less stringent employment protection legislation raises earnings inequality, while wages dispersion decreases when the labor market deregulation is introduced in a more competitive environment. We argue these results derive from the combined effects of competition intensity on workforce composition and labor market deregulation.